Hartford Beats Q4 2016 Earnings Estimates On Share Repurchases, Higher Investment Income

Hartford Financial (NYSE:HIG) announced mixed fourth quarter 2016 results last week, with core earnings easily exceeding market expectations but revenues missing estimates. The company’s core earnings of $1.08 per share beat estimates by 14 cents on a 9% rise in investment income and positive impact of share repurchases, which offset the 23% decline in Property and Casualty core earnings. The rise in investment income was attributed to higher income from limited partnerships (LPs) and other alternative investments.

However, Hartford reported a net loss of $81 million in Q4 2016 compared with net income of $421 million in Q4 2015, owing to a charge of $423 million resulting from a reinsurance agreement with National Indemnity Company covering Hartford’s A&E liability exposures. In terms of the top line, the company’s total revenues of $4.54 billion missed Reuters’ compiled consensus estimates of $4.7 billion.

Segment Results

Hartford currently has three major lines of businesses – property and casualty insurance, group life insurance and investments. The P&C insurance division contributes about 70% of the company’s revenues and 66% of its core earnings. Hartford has a 1.89% share in the U.S. P&C insurance market in terms of premiums earned, and offers both commercial and consumer insurance products. In the commercial segment, Hartford is the second largest player in the worker’s compensation space in the country, behind Travelers (NYSE:TRV). The consumer P&C insurance division is comprised of personal automobile and homeowners’ multiperil products. ^[1]
In the fourth quarter, underwriting gains in Commercial lines decreased by 25% y-o-y and the underlying combined ratio – the ratio of claims and expenses to premiums earned – worsened by 320 basis points to about 91.3% on the back of higher net unfavorable prior accident year development (PYD) and higher catastrophe losses, especially from Hurricane Matthew.

The higher unfavorable PYD resulted from higher claims in the small commercial automobile and package business lines, partially offset by favorable frequency in workers’ compensation. Workers’ compensation results were aided by a lower unemployment rate in the U.S in Q4 2016. The U.S. unemployment rate was around 4.7% in the fourth quarter, about 20 basis points better than figures in the first three quarters of last year. It was around 5.0% during the same period in 2015. 
As shown in the interactive chart below, we expect Hartford’s commercial lines combined ratio to stabilize around 91-92% levels by the end of our forecast period. However, if remains at current levels of 95% owing to continued lower underwriting gains and higher catastrophe losses, there could be an 8-10% decline in the company’s valuation, per our estimates.

Hartford’s consumer business reported an underlying combined ratio of 100.2%, showing an improvement of 90 basis points over the prior year quarter due to lower catastrophe losses partially offset by higher current year personal automobile losses and slightly unfavorable automobile prior accident year development (PYD). A ratio above 100% indicates underwriting losses, whereas below 100% means the company is making an underwriting profit.

As shown in the interactive chart below, we expect Hartford’s consumer lines combined ratio to gradually improve going forward and stabilize around 92-93% by the end of our forecast period. However, if the the company is unable to improve its underwriting gains and the consumer lines combined ratio remains high at around 100%, there could be a 10-12% decline in the company’s valuation, per our estimates.

Have more questions about Hartford Financial? Please refer to our complete analysis for Hartford Financial

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1. 2015 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM, NAIC, March 28 2016 [↩]